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Consider the following statements regarding the concept of depreciation.
1. Depreciation is the cost of the good divided by the number of years of its useful life.
2. No real expenditure may have actually been incurred each year yet depreciation is annually accounted for.
Which of these statements are correct?
- a)1 Only
- b)2 Only
- c)Both 1 and 2
- d)None of them
Correct answer is option 'C'. Can you explain this answer?
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Verified Answer
Consider the following statements regarding the concept of depreciati...
- Depreciation is an annual allowance for wear and tear of a capital good. In other words it is the cost of the good divided by the number of years of its useful life.
- Notice here that depreciation is an accounting concept. No real expenditure may have actually been incurred each year yet depreciation is annually accounted for. In an economy with thousands of enterprises with widely varying periods of life of their equipment, in any particular year, some enterprises are actually making the bulk replacement spending.
- Thus, we can realistically assume that there will be a steady flow of actual replacement spending which will more or less match the amount of annual depreciation being accounted for in that economy.
Most Upvoted Answer
Consider the following statements regarding the concept of depreciati...
Depreciation
Depreciation is an accounting method used to allocate the cost of an asset over its useful life. It represents the decrease in the value of the asset over time due to factors such as wear and tear, obsolescence, or aging. It is a non-cash expense that is recorded annually in the financial statements of a business.
Statement 1: Depreciation is the cost of the good divided by the number of years of its useful life.
This statement is correct. Depreciation is calculated by dividing the cost of the asset by its useful life. The cost of the asset includes not only the purchase price but also any other costs incurred to make the asset ready for use, such as installation or transportation costs. The useful life is an estimate of the number of years that the asset will be used or the number of units of output it will produce.
For example, if a machine is purchased for $10,000 and is expected to have a useful life of 5 years, the annual depreciation expense would be $10,000 divided by 5, which equals $2,000.
Statement 2: No real expenditure may have actually been incurred each year yet depreciation is annually accounted for.
This statement is also correct. Depreciation is an accounting concept and does not necessarily reflect the actual cash outflow in each year. It is a systematic way of allocating the cost of an asset over its useful life, regardless of whether or not any actual expenditure occurs.
For example, if a company purchases a building for $1 million and it is expected to have a useful life of 20 years, the company would record an annual depreciation expense of $50,000 ($1 million divided by 20). However, the company may not actually spend $50,000 each year on the building. The annual depreciation expense is simply an accounting entry to spread the cost of the building over its useful life.
Conclusion
In conclusion, both statements are correct. Depreciation is calculated by dividing the cost of the asset by its useful life, and it is recorded annually in the financial statements even if no real expenditure has been incurred each year. Depreciation helps businesses to accurately reflect the decrease in value of their assets over time and to allocate the cost of those assets to the periods in which they are used to generate revenue.
Depreciation is an accounting method used to allocate the cost of an asset over its useful life. It represents the decrease in the value of the asset over time due to factors such as wear and tear, obsolescence, or aging. It is a non-cash expense that is recorded annually in the financial statements of a business.
Statement 1: Depreciation is the cost of the good divided by the number of years of its useful life.
This statement is correct. Depreciation is calculated by dividing the cost of the asset by its useful life. The cost of the asset includes not only the purchase price but also any other costs incurred to make the asset ready for use, such as installation or transportation costs. The useful life is an estimate of the number of years that the asset will be used or the number of units of output it will produce.
For example, if a machine is purchased for $10,000 and is expected to have a useful life of 5 years, the annual depreciation expense would be $10,000 divided by 5, which equals $2,000.
Statement 2: No real expenditure may have actually been incurred each year yet depreciation is annually accounted for.
This statement is also correct. Depreciation is an accounting concept and does not necessarily reflect the actual cash outflow in each year. It is a systematic way of allocating the cost of an asset over its useful life, regardless of whether or not any actual expenditure occurs.
For example, if a company purchases a building for $1 million and it is expected to have a useful life of 20 years, the company would record an annual depreciation expense of $50,000 ($1 million divided by 20). However, the company may not actually spend $50,000 each year on the building. The annual depreciation expense is simply an accounting entry to spread the cost of the building over its useful life.
Conclusion
In conclusion, both statements are correct. Depreciation is calculated by dividing the cost of the asset by its useful life, and it is recorded annually in the financial statements even if no real expenditure has been incurred each year. Depreciation helps businesses to accurately reflect the decrease in value of their assets over time and to allocate the cost of those assets to the periods in which they are used to generate revenue.
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Consider the following statements regarding the concept of depreciation.1. Depreciation is the cost of the good divided by the number of years of its useful life.2. No real expenditure may have actually been incurred each year yet depreciation is annually accounted for.Which of these statements are correct?a) 1 Onlyb) 2 Onlyc) Both 1 and 2d) None of themCorrect answer is option 'C'. Can you explain this answer?
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Consider the following statements regarding the concept of depreciation.1. Depreciation is the cost of the good divided by the number of years of its useful life.2. No real expenditure may have actually been incurred each year yet depreciation is annually accounted for.Which of these statements are correct?a) 1 Onlyb) 2 Onlyc) Both 1 and 2d) None of themCorrect answer is option 'C'. Can you explain this answer? for UPSC 2024 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Consider the following statements regarding the concept of depreciation.1. Depreciation is the cost of the good divided by the number of years of its useful life.2. No real expenditure may have actually been incurred each year yet depreciation is annually accounted for.Which of these statements are correct?a) 1 Onlyb) 2 Onlyc) Both 1 and 2d) None of themCorrect answer is option 'C'. Can you explain this answer? covers all topics & solutions for UPSC 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Consider the following statements regarding the concept of depreciation.1. Depreciation is the cost of the good divided by the number of years of its useful life.2. No real expenditure may have actually been incurred each year yet depreciation is annually accounted for.Which of these statements are correct?a) 1 Onlyb) 2 Onlyc) Both 1 and 2d) None of themCorrect answer is option 'C'. Can you explain this answer?.
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